The number of employees paying into workplace pensions has rocketed over the past decade to reach 79% in April 2021, or 22.6m employees, according to latest figures from the Office for National Statistics (ONS).
This is a hefty rise from the 47% of employees who were paying into a workplace pension in 2012, before the government’s auto-enrolment scheme was introduced.
Under auto-enrolment, the majority of employers automatically sign you up to a workplace pension scheme, into which a minimum total contribution set by the government must be made, which is currently 8% for most people. Read more about how this works in our article How does pension auto-enrolment work?
However, there are concerns that people aren’t contributing enough into their workplace pensions to provide for a comfortable retirement, and the cost of living crisis is expected to impact the amount of money people can afford to save.
Emma Douglas, director of workplace savings and retirement at Aviva, said: “Savers were encouraged not to cancel their pension savings through the pandemic, despite competing pressures. There is, however, no room for complacency. The rising cost of living is placing extreme pressure on household finances. The need to defend pension saving is stronger than ever.”
The most common type of workplace pension is a defined contribution scheme (or money purchase plan). There are also defined benefit pensions (or final salary schemes) which provide a gold-plated retirement income, but these are a dying breed and primarily found in the public sector.
Here, we look at the different types of workplace pensions, and how you can make the most of their benefits to give yourself the greatest chance of a comfortable retirement.
If you’re thinking about getting professional financial advice, you can find a local financial adviser on VouchedFor or Unbiased.
Alternatively, if you’re looking for somewhere to start, we’ve partnered with independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,000 reviews on VouchedFor, the review site for financial advisors.
Contents
- Workplace defined contribution pensions
- How much do you pay into a workplace defined contribution pension?
- Tax relief and workplace pensions
- Where is your money invested?
- How much will you receive from a workplace defined contribution pension?
- Workplace defined benefit pensions
- How much will you receive from a workplace defined benefit pension?
- How much can you contribute to a workplace pension scheme?
- Can you pay into both a workplace pension and a private/personal pension?
- Can you transfer your workplace pension into another pension scheme?
- When can you access your workplace pension?
- How much do you need to save into a workplace pension for retirement?
- Where can you seek further help?
Workplace defined contribution pensions
If you’re paying into a workplace pension, chances are, it’s a defined contribution scheme. This means that your contributions are invested, and the amount you receive when you retire is based on how much you and your employer have contributed, as well as investment performance. Read more about this type of workplace pension in our article What is a defined contribution pension?
This type of workplace pension doesn’t offer a guaranteed income in retirement, unlike defined benefit (final salary) schemes. However, the hope is that over the years, you’ll benefit from investment growth and build up a big enough pot to provide for a comfortable retirement. Find out more in our guide How much should I save for retirement?
How much do you pay into a workplace defined contribution pension?
The government’s auto-enrolment rules apply to this type of pension. These mean that if you’re an employee aged 22 or over and earn at least £10,000, you’ll be automatically enrolled into a workplace pension scheme. It’s possible to opt out if you wish, but doing so isn’t generally considered sensible, as you’ll miss out on employer contributions.
If you earn less than £10,000, you can still choose to join your employer’s pension scheme to benefit from their contributions. You may work for a few employers earning less than the auto-enrolment threshold for each job. Read more about joining your company pension scheme if you’re on a low salary in our article Can I join my workplace pension scheme if I’m on a low salary?
Under current rules, your employer must pay at least 3% of your qualifying earnings into your pension, but they can choose to pay in more than this if they want to. If they pay in the minimum, then you’ll need to pay in the remaining 5% of your qualifying earnings to bring the total contribution up to the government minimum of 8%.
As mentioned, some employers pay in more than the minimum, and if you wish, you may also be able to contribute extra. Some employers will offer to match your contributions up to, for example, 10% of salary, and these additional employer contributions can effectively be considered a pay rise that you’ll ultimately receive in retirement.
You’ll find the amount of pension contributions that are being deducted from your salary before tax on your payslip, but if you want clarity on this and whether you’ve been auto-enrolled, you can always check with your employer.
Pension contributions under auto-enrolment only have to be paid on so-called ‘qualifying earnings’ of between £6,240 and £50,270 in the 2022/23 tax year. Therefore, if you earn a low or particularly high salary, the amount you receive as a proportion of salary into your pension may differ from the standard percentage under auto-enrolment rules. If you’re unsure exactly how much is being paid into your pension, you may want to check with your employer.
Tax relief and workplace pensions
You receive tax relief at your highest marginal rate on pension contributions. The majority of pension savers receive tax relief at the basic rate of 20%, and you receive this automatically. If you’re a higher-rate taxpayer, you may have to claim the additional 20% tax relief, for a total of 40%, through your tax return.
However, some employers use an arrangement where your pension contributions are taken from salary before income tax is paid, and the pension scheme claims the tax relief at your highest rate of income tax, which means you don’t have to complete a tax return to receive this as a higher rate or additional rate taxpayer. You can read more in our article How pension tax relief works.
Where is my workplace pension invested?
Your pension contributions in a defined contribution pension are invested, and you’ll probably have your contributions automatically invested into a standard ‘default fund’ unless you choose a different option. This will usually invest in a mixture of assets, with the combination changing as you approach retirement. For example, you may be mainly invested in shares if you’re a decade or more away from retirement, but a greater proportion of your pot will shift into bonds as you approach retirement age to reduce your investment risk. Find out more in our article Where is my pension invested?
However, your workplace default option may not be the best option for you, depending on your attitude to risk, age, and retirement plans. You may be comfortable taking more risk, and plan to stay invested into retirement if you’re likely to use pension drawdown. Remember that over the long term of, say, 10 or more years, shares often perform far better than cash or bonds.
How much will you receive from a workplace defined contribution pension?
This depends on several factors, and it’s impossible to be certain how much your pension pot will amount to in retirement, and therefore the income you will receive. The value of your pension depends on how much your employer has paid into your pension, how long your pension remains invested, and how the underlying investments perform over time.
You can use the Rest Less pension calculator to get an estimate of the income you’ll receive at retirement based on your pension’s value. This can include your State Pension entitlement if you want it to, and you can also see the impact of taking 25% of your pension as tax-free cash. You can amend your retirement age and the level of income you want as well, to see how these affect the length of time your pension will last.
Workplace defined benefit pensions
If you’re lucky enough to have access to a defined benefit pension (final salary) pension scheme, you’ll be guaranteed a fixed income in retirement that’ll last the rest of your life. However, this type of workplace pension is a dying breed, as they’re too expensive for employers to run, particularly given we’re all living longer. Read more in our article What is a defined benefit pension?
If you’re a public sector employee, such as an NHS worker, teacher, or you work for the civil service, you’ll usually pay into a defined benefit pension. If you’ve been employed by the public sector in the past, you may also have built up some entitlement to a retirement income through a defined benefit pension. Find out more about the benefits of these pensions and how some of the major schemes work in our article How do public sector pensions work?
Similarly to defined contribution pensions, with a defined benefit pension your money is invested in investments such as shares and bonds. However, you’ll be promised a fixed income in retirement, whatever your underlying investments’ performance or the amount you contribute during your employment. Ultimately, any investment risk falls to your employer, which is why the majority who previously offered this type of pension scheme have now axed them. Meanwhile, while some of the biggest public sector pension schemes remain extremely valuable, many have changed the way they work so they are slightly less generous than previously.
How much will you receive from a workplace defined benefit pension?
This depends on the calculation your employer uses to work out your income in retirement, but it’s usually based on a proportion of your final year’s pay (or an average of your overall earnings), multiplied by the number of years you have been paying into the pension scheme and working for your employer.
The rate at which you build up pension benefits during your time in the scheme depends on the ‘accrual rate’, which is usually a fraction of salary – for example, 1/60 or 1/80. For example, let’s take the Teachers Pension Scheme. As a career average pension scheme, you build up a pension of 1/57th of your salary each year while you’re a scheme member, eventually receiving this as an annual income when you retire.
How much can you contribute to a workplace pension scheme?
Whether you’re paying into a workplace defined contribution or defined benefit scheme, you can only pay in a certain amount each year, and over your lifetime. These are known as your pension allowances.
The amount you can contribute to a pension each year and benefit from tax relief – known as the ‘annual allowance’ – is £60,000 or 100% of your earnings, whichever is lower. If you earn more than £200,000, the limit is lower. If you’ve previously accessed a pension flexibly and taken any income from that, as opposed to just your tax free cash, then the allowance drops to £10,000 a year, and becomes known as the Money Purchase Annual Allowance. Find out more about this in our guide What is the Money Purchase Annual Allowance?
Previously you might have needed to consider the lifetime allowance, which was the total amount you can build up over your lifetime in pension savings without paying any additional tax when you withdraw money from them. This allowance however was abolished on 6 April 2023 so no longer applies.
Read more about your pension allowances so you don’t fall foul of the rules in our guide How do pension allowances work?
Can you pay into both a workplace pension and a private/personal pension?
You’re able to pay into a personal pension to supplement your workplace pension pot if you want to, provided you stick within your pension allowances (see above). Alternatively, you may wish to use other savings vehicles such as individual savings accounts (ISAs) to supplement your workplace pension. Learn more in our guide Is it better to save into an ISA or a pension?
Of course, if you’re self-employed, you won’t have access to a workplace pension scheme and it’s important to consider how you’ll save for retirement yourself. You can find out more about your options in our article Pensons for the self-employed.
Can you transfer your workplace pension into another pension scheme?
If you’ve contributed to several workplace pensions over the years, you might want to think about transferring these into a single account. This may involve transferring your workplace defined contribution pension into a standard personal pension or self-invested personal pension, which could make it easier to manage your retirement pot, and potentially reduce the charges you pay while also giving you greater flexibility and investment choice. Read more in our articles How to transfer your pension? and How private pensions work.
Alternatively, you may want to think about transferring an old workplace pension to your new company’s pension scheme when you move jobs, but check that you’re happy with the fees and investment choice in the new plan before doing so.
However, it’s not always wise to move your pension to another provider. For example, transferring a workplace defined benefit (final salary) pension into a personal or another workplace defined contribution pension, is rarely the right move, as you’ll be giving up a guaranteed retirement income. Find out more in our guide Should I transfer my final salary pension?
When can you access your workplace pension?
If you’re paying into a workplace defined contribution pension, you might be able to access your savings pot from the age of 55, rising to 57 in 2028, although most employers have a ‘normal retirement age’ at which you start taking benefits, which may be 60 or 65.
You can use your retirement savings however you want, and you’re able to withdraw 25% of your pension as a tax-free lump sum (but it’s often more tax-efficient to spread your tax-free withdrawals over a number of years). You can find out more in our article Should I take my tax-free lump sum at age 55?
If you’re paying into a defined benefit pension, the age at which you can access your money again depends on your particular scheme’s rules. The majority of defined benefit pensions have a retirement age of 65, but you can check when you will get your pension with your pension provider. Some older sections of public sector pension schemes have a retirement age of 60.
If you suffer ill health or a disability that’s likely to reduce your life expectancy, you may be able to access your defined contribution pension before the age of 55. However, taking your pension early could reduce the amount you receive in retirement. Read more in our article Can I retire early because of illness or disability?
Alternatively, you might want to delay your pension to potentially increase the amount you receive beyond 55 or your particular scheme’s retirement age.
How much do you need to save into a workplace pension for retirement?
Working out how much you need to save for retirement can be extremely difficult, but there are some basic guidelines and useful online calculators that can help.
As a general rule of thumb, take your age and halve it, and contribute this figure as a percentage of your salary to your pension every month for the rest of your working life. For example, if you’re 50 you should aim to save 25% of your salary before tax every month. Really, though, it’s important to consider what’s affordable to you in your current circumstances, and particularly with the cost of living rising, and to simply save something towards your retirement each month. Every pound helps, and you’ll benefit from tax relief on any amount that you save into a pension.
The amount you ultimately need to save for retirement depends, of course, on the lifestyle you want to have. According to calculations from consumer association Which?, a comfortable retirement requires an income of about £26,000 a year after tax for a couple, or £19,000 if you’re single, based on interviews with 7,000 retirees.
When you’re taking pension benefits from a workplace defined contribution scheme you have a number of options to provide you with a retirement income. You can do this through drawdown, taking income as and when you need it, or buying an annuity. Read more about your options in our article Your pension options at retirement?
A £500,000 pension pot would buy a retirement income of just over £21,000 a year at age 66, based on average annuity rates. Read more in our article Annuities explained. Saving this amount may seem impossible, but you may receive a higher income through a carefully managed drawdown plan. Find out more in our article What is pension drawdown and how does it work? Bear in mind that you’ll also get the State Pension at age 66 (rising to 67 between 2026 and 2028).
Where can you seek further help?
The Government’s Pension Wise service, run by the Pensions Advisory Service and Citizens Advice, provides people aged 50 and above with free guidance on their pension choices at retirement.
However, if you’re not sure you’re saving enough, or you want tailored advice on your pension, you might want to speak to an independent financial adviser. They can recommend the best option for you based on your individual circumstances. You can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guides on How to find the right financial advisor for you or How to get advice on your pension.
If you’re thinking about getting professional financial advice, you can find a local financial adviser on VouchedFor or Unbiased.
Alternatively, if you’re looking for somewhere to start, we’ve partnered with independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,000 reviews on VouchedFor, the review site for financial advisors.